The Sri Lankan Meltdown

A Humanitarian Crisis

INTRODUCTION The Sri Lankan economy is in deep waters right now. The island nation has a foreign reserve of only $2.31 billion but faces an external debt repayment of around $4 billion in 2022. The country's prime minister has resigned, violent protests have overshadowed the economy, and severe power cuts are haunting over. The nation is suffering from its worst economic turmoil since its inception. All of this is a product of various factors that have been thoroughly churned, resulting in a nightmare for the country. SOWING THE SEEDS OF THE CRISIS

It all begins with the dominance of the single-family that controlled Sri Lanka ‘ The Rajapaksa’. The clan had more than 9 members in the Sri Lankan cabinet and controlled 75% of the entire budget of the country. According to some, the family is completely responsible for the state in which lies today. Former power minister of the country, Patali Champika Ranawaka agrees. He says "Rajapaksa family clan is responsible for the crisis," while elaborating that 78 per cent of the total debt owed by Sri Lanka occurred during the rule of the Rajapaksa’s. The former prime minister Mahinda Rajapaksa has had control of Sri Lanka for most of the past two decades. He reigned as the prime minister of the country from ( 2004-5) then as the president (2005-15) and then again as the prime minister from(2018-22). President Gotabaya Rajapaksa has also had his share in the country’s management first as a defence secretary, then playing a major role in ending the civil war ruthlessly by defeating the LTTE in 2009. Due to this, he has been viewed in two contrasting ways by the majority and minority communities of the nation. Sinhalese Buddhist majority consider him as a “ War Hero”, while he is heavily distrusted by the minority Tamil speakers. Major contributors to the chaos The policies adopted by the Rajapaksa government are said to be the basic foundation upon which the crisis was built. Tax cuts President Gotabaya Rajapaksa was elected as the president of the country in 2019 during the election campaigns he made various promises among which was one, that promised deep tax cuts. Wasn’t this illogical? but the voters never asked and Gotabaya never bothered to think about it.

According to Ali Sabry the finance minister of the island nation, Sri Lanka lost around 1 million taxpayers in the past two years after the regime was put into practice in November of 2019. The cabinet slashed the value-added tax (Vat) from 15% to 8% and with it abolished 7 other taxes. This blocked a major source of income for the government which is hurting the country now. These sweeping tax cuts led to a credit rating downgrade in the following year, prompting Sri Lanka to get alienated in international financial markets further exacerbating the problem. Fate As it is said “fate doesn’t favour fool” Sri Lanka is a perfect example of the same. Going into the pandemic Sri Lanka was already in a poor condition, the pandemic further aggravated it by blocking a source that contributed 12% of the Sri Lankan GDP, the tourism sector. The Easter Bombings in April 2019 had already scared the tourists but when the Wuhan virus took off, the revenue from tourism was completely blocked off.

Fig 1- Revenue comparison

Fig 2 – Tourist arrival

The Wuhan virus also hit the remittances that Srilanka received, which took a toll on the foreign currency reserves of the country as these remittances are a major contributor to the foreign reserves of the country.

The Agricultural fiasco

Is organic farming good? Most would answer yes and that’s the right answer too. But If I ask a country that depends on agriculture for 8% of its GDP to stop using fertilizer and other chemicals overnight to promote good health, would you call that a good decision?

That was the ‘masterstroke’ that president Gotabaya played, that too not to promote good health as he projected it but to reduce the import bill as the nation was running on low foreign reserves.

The result of this decision was brutal and severe. Against the expectations of a similar yield, domestic rice production fell 20% in just the first 6 months of the experiment. Sri Lanka, which for long was self-sufficient in meeting its rice needs now had to import rice amounting to $450 million which further increased its import bill against the expectation of a decrease. This decision also took a toll on the country’s tea production, which was a major foreign exchange earner.

The Debt issues and the Chinese knockdown

Debt is not a new issue for the island nation it has always run high on debt. Even in 2017, 95% of the country’s revenue went towards debt repayment.

In April 2022, Sri Lanka said that it would stop paying its international debt to conserve dwindling foreign reserves, vital for importing key raw materials from abroad.

On May 19 2022, after the deadline passed for making $78m (£62.8m) of payments to international creditors, Nandalal Weerasinghe, the central bank governor, said: “Our position is very clear: until there is a debt restructure, we cannot repay.” So what can be inferred is that the overburden of debt has hurt Sri Lanka really bad.

China has had an image of exploiting smaller nations through its sheer power and dominance, for its selfish motive and leaving them in the rubble. Sri Lanka and Pakistan are a few examples of the same.

“There are two ways to conquer and enslave a country: One is by the sword; the other is by debt” China has long been known to be a staunch supporter of the latter. Today, China is the world's largest creditor and it doesn’t lend out without any selfish motive!. The Belt and Road initiative is one such motive of the world’s 2nd largest economy. Under this initiative, China funds infrastructure projects in small developing countries like Sri Lanka, Pakistan and Djibouti by lending out loans at a higher rate than the international lending institutes like the world bank and that too for a shorter period.

Then it hands out those projects to Chinese companies and when these countries aren’t able to pay them back due to the tough policy of the loan, these projects are handed to China itself.

Hence China gets twin benefits from such lending first, it establishes its dominance in a foreign country and second it hands out projects to Chinese companies, so the money comes back to China. This is what happened with the $1.3 billion Hambantota port. The port-like other ambitious projects funded from Chinese loans turned out as a White elephant project. Hence now Sri Lanka has handed many of its strategic projects into the Chinese hands

Aftermath

No one knows what will be Sri Lanka’s condition. Despite a state of emergency in place, eight people have been killed and more than 200 wounded as weeks of demonstrations have escalated into bloodied clashes between groups supporting and protesting against the government.

For months Rajapaksa Government resisted calls by experts to take help from IMF but the condition is such that the nation has to take the step. It planned to approach IMF in April 2022, the IMF said that discussions about the possible settlements would be discussed in the coming months.

In the interim, Rajapaksa has also sought help from China and India, particularly assistance on fuel from the latter. A diesel shipment under a $500 million credit line signed with India in February is expected to come soon.

India has signed a $1 billion credit line for importing essentials, including food and medicine, and the Rajapaksa government has sought at least another $1 billion from New Delhi.

After providing the Central bank of Sri Lanka with a $1.5 billion swap and a $1.3 billion syndicated loan to the government, China is considering offering the island nation a $1.5 billion credit facility and a separate loan of up to $1 billion.

Author- Aditya Ohri